By Mark Jewell
BOSTON (AP) — So is it time to get back in?
Investors left anxious after the stock market's wild ride over the last year have reason to be a bit more confident. Volatility has eased and the Standard & Poor's 500 index is up more than one-third from the depths it sank to in early March.
But be careful. It's easy for investors to trip up in good times and bad. And potential pitfalls have emerged amid the market's turnaround.
For starters, don't presume the recent gains will continue uninterrupted.
"Nobody expects to go straight up from here," said Greg Pinto, a certified financial planner with Boston-based Baystate Financial Services.
Here are seven mistakes individual investors should be careful to avoid in the current market:
1. TRYING TO TIME THE MARKET: You hear it from financial planners and even investment pros all the time: Don't presume to have the psychic ability to know where the market is headed. The inclination to follow the herd by selling as the market tanks and buying back in after a recovery starts can be especially damaging. A study by the Boston-based consulting firm Dalbar Inc. found that a buy-and-hold investor who put $10,000 into an S&P 500 index mutual fund in January 1989 would have ended up with nearly $50,000 by the end of 2008, had they not made any changes expect for annual rebalancing. But an investor who darted in and out during rallies and slumps over that same 20-year period would have seen that $10,000 grow to less than $14,500.
2. CLINGING TO UNREALISTIC EXPECTATIONS: Investors accustomed to seeing blue-chip stocks retain most of their value have been stunned over the last year. For example, General Electric Co.'s stock sank below $6 in March of this year, some 80 percent off of its 52-week high of $31. GE stock has lately traded between $13 and $14. Investors used to seeing such stocks trade at much higher prices might be inclined to think they'll eventually return to their old levels. Not necessarily. Sometimes, a company's long-term prospects simply are no longer what they once were. The same can be true for the broader market: Just because the S&P 500 topped 1,500 a couple years ago doesn't mean it will reach those dizzying heights again anytime soon.
"A lot of people are excited by the notion that they can get pick up shares of these household names very cheaply, thinking they can hit a home run," said Mark Passacantando, of Financial Planning Partners LLC in Westwood, Mass. "But the market is so complex, it would be a mistake to look at current prices versus previous prices."
3. LETTING YOUR PORTFOLIO GET OUT OF BALANCE: When markets are in turmoil, review your mix of stocks and bonds more frequently. The market is still trying to find its way, and the asset mix that may have been appropriate for you a year or two ago may no longer be a good fit. Many studies show that choosing the right mix among asset categories such as stocks and bonds has a far greater effect on long-term returns than your choices about which individual stock or mutual fund to buy.